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Negotiating through the Maze of College Costs

How Much Should College Students Borrow?

Roughly two-thirds of college students borrow money for college. The average college graduate leaves school with about $25,000 worth of debt.

Is $25,000 a reasonable amount of student loans? It really depends on where students are turning for money.

Students who borrow this much through the federal government's college loan program should be okay. Federal student loans are the safest loans because they offer protections that private loans don't provide.

Stafford Loans

Most students turn to the federal Stafford Loan program, which imposes borrowing limits. Here are the current maximum amounts that students can borrow (see chart at right):

The current interest rate on the Stafford Loan is 6.8 percent. The interest on the subsidized version of the loan is just 3.4 percent. The federal government pays the interest on subsidized Stafford loans while students are in college. To qualify for a subsidized Stafford, a family must demonstrate financial need.

Federal Student Loan Advantages

Fixed interest rates.

Students receive same rate regardless of credit scores.

Repayment can sometimes be based on a graduate's salary and not on what is owed.

Public service student loan forgiveness plan.

Bottom Line:

If undergraduates stick with Stafford Loans, they can borrow up to $27,000 without much risk.

The Myth About Getting Into College

If you read media accounts, you probably assume that most colleges reject the majority of their applicants. Untrue!

This pie chart from a new College Board report shows that schools, which reject most teenagers, are relatively rare.

Only 16 percent of colleges and universities reject 50 percent or more of their applicants. A mere 2 percent of schools turn away at least 75 percent of their applicants. In contrast, 22 percent of schools accept all comers.

College Graduation Rates

The downside to colleges that operate with easier admission policies is that they generate lower graduation statistics. Eighty three percent of students at the most exclusive institutions graduate compared with just 27 percent for schools with open enrollment.

Where to Find College Money

One of the biggest mistakes that families with college-bound teenagers make is looking in the wrong places for college cash. Here's a breakdown of where the money might be for your clients and, just as importantly, where they probably won't find any.

You'll see here the four main sources of college grants and scholarships, along with the percentage that each of them represent.

1. Federal grants (44%).

This is probably going to be a financial dry hole for all of your clients.

Why?

Even though federal grants represent the biggest source of free college money, these awards are reserved for low-income and lower middle-income families. The Pell Grant is the largest source of free federal money, but to qualify for the maximum amount -- $5,550 -- families typically have incomes below $30,000.

2. Institutional money from colleges (36%).

For many affluent families, colleges will be the most lucrative source for scholarships. The average grant that students receive from private colleges pencils out to a 49 percent tuition discount. Most public schools also offer grants to students that they covet.

It's not just A students, by the way, who qualify for these grants. Eighty eight percent of freshmen attending private colleges, for instance, receive a price cut.

3. State grants (9%).

States that provide college grants to students often have formulas that dispense scholarships based on such factors as a student's GPA, class rank and SAT/ACT scores. In other words, smart students have a better shot at state money than other teenagers.

4. Private scholarships (4%).

Many families assume that private scholarships will be the richest source of college cash, but they rarely are. Private scholarships, from sources like the Rotary and Kiwanis clubs, represent a mere 4 percent of all college grants and scholarships. The average scholarship is worth about $2,500 and it is not renewable.